Cash Flow-based Decision Rule

This is nothing but the cash flow return on capital & equity. One simple modification to the accounting return on capital and equity is to use the cash earnings to compute these returns rather than the accounting earnings. Adding non-cash accounting expenses to operating earnings yields cash operating earnings.

Therefore,

Cash Operating Income =

EBIT (1 – t) + Depreciation & other non-cash charges

Cash Return on capital = Image 68

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